Introductory Info
Date introduced: 2 December 2019
House: Senate
Portfolio: Private Senator's Bill - Senator Hanson
Commencement: The day after Royal Assent.
History of
the Bill
The Protecting
Australian Dairy Bill 2019 (the first Bill) was a Private Senator’s Bill
introduced into the Senate on 16 October 2019 by Senator Hanson. A motion was
moved that the first Bill be read a second time
but the motion was rejected.[1]
The first Bill did not proceed.
The Saving Australian Dairy Bill 2019 (the Bill) is a Private
Senator’s Bill introduced into the Senate on 2 December 2019 by Senator Hanson.
The terms of the Saving Australian Dairy Bill are similar, but not identical
to, those in the Protecting Australian Dairy Bill.
Purpose and
structure of the Bill
The purpose of the Saving Australian Dairy Bill 2019 (the
Bill) is to amend the Competition and
Consumer Act 2010 (CCA) to require the Australian Competition
and Consumer Commission (ACCC) to establish a base or minimum price for the
milk fat and protein content of milk produced on the farm in each milk region
or specified area. The relevant amendments are contained in Schedule 1 to the
Bill.
In addition, the Bill:
- proposes
that the Productivity Minister (that is, the Treasurer[2])
requires the Productivity Commission to inquire into a divestiture regime which
will apply to the food and grocery industry and
- requires
the Minister to make regulations to prescribe a mandatory code of conduct for
the food and grocery industry.
The relevant amendments are contained in Schedule 2 to the
Bill.
Background
Current
position
It has been reported:
The number of dairy farms has fallen from 20,000 in 1980 to
fewer than 6000 today, while the nation’s share in the global dairy trade has
fallen from 16 per cent in the 1990s to 6 per cent ... a complex mix of issues
had hurt the sector—from increased global competition, drought and soaring
energy prices to ageing farmers leaving the sector and their younger
counterparts finding better returns from other food items.[3]
The genesis of the current problems in the dairy industry has been documented
in a number of reports, which are set out below.
2009—Senate Economics
Committee report
On 10 September 2009, the Senate Economics Committee was
requested to investigate the varying prices being paid to dairy farmers
in different Australian states, and report on a range of matters including:
- the
economic effect on the dairy industry of announced reductions in prices to be
paid to producers by milk processors
- the
impact of the concentration of supermarket supply contracts on milk market
conditions and
- whether
the CCA (then called the Trade Practices Act) is in need of
review having regard to market conditions and industry sector concentration in
this industry.[5]
The Senate Economics Committee report describes the
circumstances that led to the inquiry as follows:
Since its deregulation in 1999 the Australian dairy
industry has evolved from a protected and regulated industry with many small
farms, to one based on fewer but larger farms competing both nationally and
internationally. During this period significant consolidation has also been
occurring at the retail and processor levels, which are now dominated by two
supermarket chains and a handful of (now mostly foreign owned) processors, placing
the farmers at a competitive disadvantage. These structural changes were
masked in the boom years. Indeed in 2007-08 Australia’s dairy farmers were
receiving record high farm gate prices for their milk and confidence was
high—there was overconfidence in some industry advisors. That changed more or
less overnight with a fall in the international commodity price which was
followed by processors announcing price step-downs.[6]
[emphasis added]
The Senate
Economics Committee recognised that new pricing policies had arisen out of
the Global Financial Crisis.[7]
The Committee made a number of recommendations, most particularly that:
- the
Government request the ACCC to use its information-gathering powers to provide
more accurate estimates of the proportions of the retail price of milk that
reflect both the costs and the profits, of farmers, processors and
retailers[8]
- the
Government request the ACCC to undertake monitoring of the pricing practices
within the dairy chain with a view to establishing whether predatory pricing or
misuse of market power is occurring[9]
- the Trade Practices Act 1974 (now known as the CCA) be amended to
inhibit firms achieving market power through takeovers or abusing market power
and that ‘market power’ be expressly defined so that it is less than market
dominance and does not require a firm to have unfettered power to set prices[10]
and
- the
ACCC conduct further study into the implications of increasing shares of the
grocery market being taken by the generic products of the major supermarket
chains.[11]
Essentially then, the Senate Economics Committee
recognised the need for substantial economic information-gathering and
analysis, to create a benchmark against which the anecdotal evidence of dairy
farmers and milk processors could be compared. This would allow sound
evidence-based policy to be formed to solve sector-wide problems.
2011
By 2011 there was considerable concern within the farming
community, and within the Parliament, about the low farm gate milk prices paid
for the supply of drinking milk to the large supermarket chains, particularly
Coles and Woolworths.
The ACCC inquired into whether the milk pricing policies
of Coles supermarkets were anti-competitive, within the meaning of that term in
the CCA. It found:
... there is no evidence that Coles has acted in breach of the Competition
and Consumer Act 2010 (CCA).
The major impact of the reduction in milk prices since
January seems to have been a reduction in the supermarkets’ profit margins on
house brand milk. These price reductions have benefited consumers who purchase
house brand milk ...
As to the relationship between dairy farmers and milk processors,
it is the case that some processors pay some farmers a lower farm gate price
for milk sold as supermarket house brand milk. However on the evidence we’ve
gathered over the last 6 months it seems most milk processors pay the same
farm gate price to dairy farmers irrespective of whether it is intended to be
sold as branded or house brand milk ...[12]
[emphasis added]
2018—ACCC
inquiry
A further inquiry by the ACCC was initiated by then
Treasurer, Scott Morrison, in response to large and retrospective reductions in
milk prices imposed by two major dairy processors in April 2016.[13]
The ACCC published the final report of its Dairy Inquiry
in 2018.[14]
The ACCC acknowledged that some existing provisions of the CCA already
operate to assist dairy farmers.
First, the collective bargaining provisions of the CCA
can be an effective remedy to market failures caused by bargaining power
imbalances, such as those identified in the dairy industry. Dairy Australia has
published a guide
to collective bargaining for dairy farmers.[15]
However, the final report also acknowledged:
... collective bargaining is less likely to be successful in
the dairy industry because the perishability of raw milk and environmental laws
prevent farmers from giving effect to a boycott by storing or dumping their
milk. Dairy processors therefore have little incentive to engage with
collective bargaining groups.[16]
Second, unfair contract terms laws are an effective
tool in some instances. This was the case, for instance, with Warrnambool
Cheese and Butter (WCB) which was required by the ACCC to alter certain terms
in its contracts with farmers that:
- allowed
it to unilaterally vary the milk price and other milk supply terms, with the
farmer unable to terminate the milk supply agreement early without incurring a
financial penalty and
- placed restrictions on farmers selling their farm and
required farmers to indemnify WCB for loss which could be avoided or mitigated
by WCB.[17]
However, the ACCC also acknowledged that the unfair
contract terms laws cannot address the problem of information asymmetries that
specifically apply in the dairy industry. Nor can they address the absence of
dispute resolution provisions in contracts.[18]
Conclusions
and recommendation
The report recognised the significant imbalances in
bargaining power at each level of the dairy supply chain and that market
failures had resulted from the information asymmetry in farmer-milk processor
relationships:
The dominant picture that has emerged is one of significant
imbalances in bargaining power at each level of the dairy supply chain.
This begins with the relationships between retailers and dairy processors, and
progresses down to the relationship between processors and farmers. The ACCC
has identified a range of market failures resulting from the strong bargaining
power imbalance and information asymmetry in farmer-processor relationships. These
features of the industry result in practices which ultimately cause
inefficiencies in dairy production. Neither the existing provisions of the Competition
and Consumer Act 2010 (CCA), nor a voluntary code of conduct, sufficiently
address these market failures. Therefore, the ACCC makes eight recommendations
for improved transparency and allocation of risk in the commercial relationship
between Australian dairy processors and farmers.[19]
[emphasis added]
Most significantly, the ACCC recommended that a mandatory
code of conduct be introduced to address the market failures that had been
identified.[20]
It is expected that it will provide dairy farmers with an additional layer of
protection, including by empowering the ACCC to take enforcement action. This
would be in the form of civil penalties and court imposed fines.
Consistent with this recommendation, the Competition and
Consumer (Industry Codes—Dairy) Regulations 2019 (the Dairy Code) was
registered on 12 December 2019 and commenced on 1 January 2020.
The terms of the Dairy Code are discussed under the heading
‘Key issues and provisions—Schedule 2’ of this Bills Digest.
End to
discount milk
In February 2019, Woolworths announced that it would stop
selling $1-a-litre milk in a move to ‘help restore Australian dairy farmers’
viability’.[21]
According to the chief executive of Australian Dairy Farmers, David Inall:
We know this isn’t the answer to all the problems in the
industry—we have considerable anxiety and distress in the dairy-farming
industry as we deal with rising costs of production. But this is a step in the
right direction, and importantly it opens the conversation with retailers more
broadly around bringing value back into the dairy case. Until the $1 milk issue
was resolved, that was a difficult conversation to have.[22]
The following month, Aldi and Coles made an equivalent
move. It was reported:
Coles and German discounter Aldi, the second- and third
biggest supermarket chains in the nation, will increase the price of their
private-label milk from today to match the shift in pricing by Woolworths last
month. The move comes as the supermarket heavyweights are under increasing
pressure from politicians and the farming community to divert stronger returns
to dairy farmers.
Coles announced last night it would lift the price of
two-litre and three-litre milk by 20c and 30c respectively. Aldi’s increases
are identical, and additional proceeds will be passed on to dairy farmers in
full.[23]
However it is likely that those dairy farmers who have
borne the brunt of the artificially low prices and the devaluation of their
product at the hands of the supermarkets will consider this to be too little,
too late. In addition, there is no guarantee, at this point in time, that the
sale of discount milk would not resume if the big supermarkets considered it
was in their best interests in the future.
Dairy
outlook
Dairy Australia has published its Situation
and Outlook Report for October 2019.[24]
It summarises the current situation as follows:
In Australia, another warm and dry winter continued to play
havoc on milk production, especially in northern regions. While Tasmania and
southern Victoria bucked the trend, most regions are dry and water availability
remains constrained. The Dairy Farm Monitor Project (DFMP) revealed how dry
conditions in 2018–19 severely impacted farm profitability due to increased
cost of production. In Victoria, costs on farm grew 20% in 2018–19 as a result
of the higher price of irrigation water and feed. The cost of irrigated water
has continued to increase in northern Victoria and southern New South Wales
(NSW), and weather outlooks offer little reassurance for the balance of the
year.
Grain and hay production is mixed, with southern areas faring
better than northern counterparts. Prolonged drought conditions across
northern Australia have seen grain crops fail and milk production contract
further in Queensland and NSW. While some failed northern grain crops have
been cut for hay, temporarily increasing fodder availability, feed supply is
forecast to remain tight.[25]
[emphasis added]
Committee
consideration
Senate Standing
Committee on Economics
The Bill has been referred to the Senate Standing
Committee on Economics for inquiry and report by 20 March 2020.[26]
Senate
Standing Committee for the Scrutiny of Bills
At the time of writing this Bills Digest, the Senate Standing
Committee for the Scrutiny of Bills had not commented on the Bill.
Financial
implications
The Explanatory Memorandum to the Bill does not specify
whether there would be any costs to the Commonwealth or to key stakeholders in
the event that the Bill is enacted.[27]
Statement of Compatibility with Human Rights
As required under Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011 (Cth), the Bill contains a statement
of its compatibility with the human rights and freedoms recognised or declared
in the international instruments listed in section 3 of that Act.
Senator Hanson has stated that the Bill is compatible with
human rights as it does not raise any human rights issues.[28]
Parliamentary
Joint Committee on Human Rights
At the time of writing this Bills Digest, the
Parliamentary Joint Committee on Human Rights had not commented on the Bill.
Key issues
and provisions—Schedule 1
Requiring a
base milk price to be determined
Item 1 of Schedule 1 to the Bill inserts proposed
Part VIIB—Milk prices into the CCA. The purpose of the new Part VIIB
is to empower the ACCC to determine a base milk price for a dairy
season for a specified area.[29]
For the purpose of new Part VIIB, the term dairy season
means the period that beings on 1 July in a year and ends on 30 June in the
following year.[30]
Proposed section 95ZRB of the CCA requires
the ACCC to determine, by legislative instrument, a price per kilogram of raw
milk solids for that season for each area specified.
In making that determination, proposed section 95ZRC
provides that the ACCC must consider the following:
- the
costs of collecting milk; processing milk; and selling dairy products
- the
long-term food security of Australia
- the
commercial viability of dairy farms, including small farms, in all states and territories
and
- the
commercial viability of milk processors in all states and territories.
Key issue—no
requirement to specify an area
The definition of specified area is inserted
in the CCA by proposed section 95ZR. The term specified
area means an area specified in a determination made by the ACCC under proposed
subsection 95ZRB(1). However, there is no requirement to determine that an
area is a specified area by legislative instrument. Whilst it is not fatal to
the operation of the Bill, having such a requirement would add clarity to those
processors who will be affected.
Key issue—disallowable
instrument
Under the Legislation Act
2003, legislative instruments are disallowable by the Parliament.[31]
This means that the ACCC’s determination of the base price of milk in a season
will be disallowable by the Parliament. The unintended consequence may be considerable
uncertainty for milk processors.
It should be noted that section 17 of the Legislation
Act provides that before a legislative instrument is made, the rule-maker
must be satisfied that consultation with persons likely to be affected by the
proposed instrument should be undertaken so long as the consultation is
appropriate and reasonably practicable. In the event of such consultation,
dairy farmers and milk processors would have the opportunity to provide input
to the final determination of the base milk price by the ACCC before the
relevant determination was made. Importantly though, the fact that consultation
does not occur will not affect the validity or enforceability of a legislative
instrument.[32]
Offence
where paying less than the base milk
A processor commits an offence under proposed section
95ZRD of the CCA if all of the following criteria are satisfied:
- the
processor enters into an agreement for the purchase of raw milk during a dairy
season
- the
processor agrees to purchase the raw milk at a price (the agreed price)
per kilogram of raw milk solids
- the
raw milk was produced in a specified area and
- the agreed price is lower than the base milk price for the dairy
season for that specified area.
The maximum penalty is 2,000 penalty units—being currently
equivalent to $420,000.[33]
Key issue—constitutional
limits
Proposed section 95ZRE of the CCA sets out
the Constitutional
limits on the operation of new Part VIIB. It will not apply in relation to
a processor unless one of the following criteria is satisfied:
- the
processor is a corporation
- the
body from whom the processor acquires raw milk is a corporation or
- the
sale of raw milk or processing of raw milk into dairy products is (or would be)
in the course of, or for the purposes of, constitutional trade or
commerce (within the meaning of Part IIIA of the CCA).[34]
It is important to note that the CCA, and therefore
the Saving Australian Dairy Act (when enacted), regulates corporations
and trade across state borders. This means that the Saving Australian Dairy
Act does not apply to unincorporated bodies where the processor and the
dairy farmer are within the same state and both processor and the dairy farmer
are unincorporated. However, if one of the parties to the transaction is
incorporated, the Saving Australian Dairy Act will apply.
For instance, the final report of the ACCC’s Dairy
Inquiry states ‘the industry has mostly transitioned away from
cooperatives, with most major processors now multinational or listed
companies’.[35]
As the transition away from cooperatives does not appear to be complete, the Saving
Australian Dairy Act might not achieve coverage across the whole of the
Australian dairy industry.
Rationale
for the Bill
Speaking in relation to the Bill, Senator Hanson provided
information about the measures in the Bill:
Fonterra pays New Zealand dairy farmers
a regulated farm-gate price which is often
more than Australian dairy farmers receive, despite the fact New Zealand has lower
costs
of production. Regulation has helped New Zealand double its
milk production since 2000 while in Australia the lack of
regulation has seen milk production go backwards, with production falling
30% since 2000. This Bill provides a minimum level of regulation based on the
New Zealand model ...
The proposition that the Bill would
offend the World Trade Organisation’s (WTO) Agricultural Agreement rules
depends on whether we can expand our dairy industry to the point where world
prices fall as a direct result. Time will tell but it seems highly unlikely
given our milk production has fallen and demand in the world is rising.[36]
WTO rules
Australia is a member of the World Trade Organisation
(WTO). As a member of the WTO, Australia upholds legal trade disciplines in
relation to its free trade agreements (FTAs) to ensure they support the
international trading system. The Australian Government will not enter into
trade agreements that fall short of the benchmarks set by the WTO.[37]
That being the case all of Australia’s FTAs comply with the overarching WTO
rules.
Under the WTO
agreements, countries cannot normally discriminate between their trading
partners—although there are some exceptions.[38]
One of the WTO agreements is the Agriculture
Agreement.[39]
Within the Agriculture Agreement are specific rules about non-tariff
measures, such as:
- market
access—various trade restrictions confronting imports
- domestic
support—subsidies and other programmes, including those that raise or guarantee
farm gate prices and farmers’ incomes and
- export
subsidies and other methods used to make exports artificially competitive.[40]
Relevant to this Bills Digest are the rules about domestic
support. A key objective of those rules has been to reduce domestic support. The
main complaint about policies which support domestic prices, or subsidise
production in some other way, is that they encourage over-production and that
this may have a distorting effect on the market for that product. Under the
Agriculture Agreement, ‘measures with minimal impact on trade can be used
freely’.[41]
Senator Hanson is correct in her assessment
that the measures in Schedule 1 to the Bill will not breach the Agriculture
Agreement unless the base milk price has the effect of encouraging dairy
farmers to significantly increase their milk production.
Effect on trade with New Zealand
According to the South Australian Dairyfarmers’
Association (SADA) the effect of the measures in Schedule 1 to
the Bill may be to unintentionally:
- open up Australia to more imported milk products from New Zealand and
- undermine the benefits to the dairy industry which flow from the China Australia
Free Trade Agreement (ChAFTA).[42]
The SADA is concerned that setting a base price to be paid
by processors to dairy farmers for their milk will drive up the price of dairy
products produced in Australia—that is, there will be a consequential increase
in prices to be paid by consumers. This may have the effect of encouraging an
increase in imported milk products and cheese (including drinking milk) from
New Zealand.[43]
Effect on
ChAFTA
The SADA states that ‘China is Australia’s largest market
for dairy exports ... worth $905 million in 2017 and growing’.[44]
Australia’s main competitors are New Zealand, the European Union and the United
States.
ChAFTA is closing the competitiveness gap with New Zealand.
Tariffs will be progressively eliminated across all Australian dairy products.
Notably, New Zealand’s FTA with China contains restrictive safeguard measures
on a wide range of dairy products, including liquid milk, cheese, butter and
all milk powders (where China raises the tariff back to the higher normal rate
when New Zealand exports exceed a certain volume).
By contrast, under ChAFTA, Australia only faces a
discretionary safeguard on whole milk powders, with the safeguard trigger
volume set well above 2017 trade levels and indexed to grow annually. For all other
dairy products under ChAFTA Australia will receive unlimited preferential
access. Given time the advantages of ChAFTA will tend to favour Australia ...
The effect of a protected Australian market would be to
invite China to respond by restoring their tariff walls and retarding access to
an increasingly lucrative market for Australian farmers.[45]
In effect, by creating a milk floor price the SADA is
concerned that the Bill may operate to make Australian dairy products less
internationally competitive and this could erode the gains made by better
access to Chinese markets under ChAFTA.
Key issues
and provisions—Schedule 2
Divestiture inquiry
Item 1 of Schedule 2 to the Bill inserts proposed
section 46AA Misuse of market power—Productivity Commission inquiry into a
divestiture regime into the CCA.
The proposed section operates as follows.
First, proposed subsection 46AA(5) introduces the
term Productivity Minister which refers to the Minister
administering the Productivity
Commission Act 1998.[46]
The Productivity Commission Act establishes the Productivity Commission
(PC) whose functions include holding inquiries and reporting to the Minister
about matters relating to industry, industry development and productivity that
are referred to it by the Minister.
Second, proposed subsection 46AA(1) of the CCA
requires the Productivity Minister to refer the following matters
for inquiry the day after the commencement day of the Saving Australian Dairy
Act:
- the
effectiveness of the amendments to the CCA which are brought about by
Schedule 1 to the Saving Australian Dairy Act
- whether
a legislative regime that requires divestiture by corporations would encourage
greater competition in the food and grocery industries and
- whether
the legislative regime for divestiture orders provided by Part XICA (the
Electricity Industry) of the CCA[47]
would be appropriate to apply to the food and grocery industries to encourage
greater competition.
Proposed subsection 46AA(4) of the CCA has
the effect that such an inquiry is deemed to be a matter relating to industry,
industry development and productivity.
Third, proposed subsection 46AA(2) prescribes
certain procedural requirements for the Productivity Minister when he, or she,
is referring an inquiry—including but not limited to the time by which the PC must
submit its report.
These requirements are consistent with the terms of
subsection 11(1) of the Productivity Commission Act.
Divestiture
under Part XICA
The Treasury Laws
Amendment (Prohibiting Energy Market Misconduct) Act 2019 (Energy
Market Misconduct Act) sets out a complex and highly technical process for
dealing with four types of conduct:
- prohibited
conduct in relation to electricity retail prices
- prohibited
conduct in relation to the electricity financial contract market
- prohibited
conduct in relation to the electricity spot market (basic) and
- prohibited
conduct in relation to the electricity spot market (aggravated).
Relevant to this Bills Digest, the Energy Market
Misconduct Act provides that the Treasurer may respond to the most
egregious conduct (type 4 above) by applying for a divestiture order from the
Federal Court.[48]
These provisions will commence on 10 June 2020.
The Court may make a divestiture order in relation to the
body corporate if:
- the
Court finds that the relevant conduct is type 4 conduct and
- the
Court is satisfied that the order is a proportionate means of preventing the relevant
corporation, or any related body corporate, from engaging in that kind of
prohibited conduct in the future.[49]
The reason for the meticulous drafting of the Energy
Market Misconduct Act is to avoid any allegation that a divestiture order
breaches section 51(xxxi) of the Constitution
which guarantees that property being acquired under Commonwealth legislation is
acquired on ‘just terms’. To that end, section 153ZC of the CCA will, on
commencement, provide that a divestiture provision has no effect to the extent
that it would infringe section 51(xxxi) of the Constitution.
Other
divestiture provisions
Section 50 of the CCA prohibits a corporation from
acquiring shares of a body corporate or assets of a person if the acquisition
would have the effect, or be likely to have the effect of substantially
lessening competition.
The Federal Court of Australia may stop an acquisition
of shares or assets which is likely to have the effect of substantially
lessening competition in an Australian market.[50]
The Court may also ‘undo’ such an acquisition by requiring the shares or
assets to be divested if it, or the ACCC, has not stopped the acquisition in
time.[51]
Essentially then, the law operates at two points in time being either:
- at
the time the acquisition is contemplated so that the ACCC can obtain a
Court order to stop it going ahead or impose conditions on the merger or
- immediately
after an unauthorised acquisition to require the corporation to divest only
those assets which came into its possession as a result of that unauthorised
activity so that it is returned to its previous position.
Section 81 of the CCA operates to unravel the
contravening conduct to re-establish the competition that existed before
the market was distorted by the acquisition.[52]
Potential
difficulties
There are two potential difficulties arising from the
divestiture power in the Energy Market Misconduct Act:
- it
is not clear that the powers must be used merely to establish (or re-establish)
competition as with the merger provisions. In that case, the powers might be
said to operate as a penalty similar to forfeiture
- there
is no clear mechanism to address a circumstance where there is no buyer for the
securities or assets which are the subject of a divestiture order or where the
buyer is not considered a suitable buyer in accordance with the provisions of
the Foreign
Acquisitions and Takeovers Act 1975. This could lead to the Treasurer obtaining
an order for divestiture under an Act and then making an order under a
different Act that the proposed acquisition is prohibited.[53]
When the PC conducts its inquiry it will need to consider
these matters carefully given that proposed section 46AA is directed
towards the food and grocery industry. Although the Explanatory Memorandum is
silent on the matter, the PC may, in effect, be considering the manner and extent
in which divestiture orders may be made against Coles, Woolworths and Aldi in
order to ‘encourage greater competition’. This is a serious matter, and the
short time limit in which the PC is to submit its report (by 1 January 2021)
will very likely be insufficient for such a task.
Making a
mandatory Code of Conduct
Item 2 of Schedule 2 to the Bill purports to insert
proposed subsections 51AE(3) and (4) into Part IVB of the CCA. However,
those subsections already exist.[54]
Existing subsection 51AE(1) authorises the making of
regulations to prescribe an industry code, and to declare the industry code to
be a mandatory industry code or a voluntary industry code.
The Bill seeks by proposed subsections 51AE(3) and (4)
to require the making of a mandatory industry code that relates to the food and
grocery industry within six months of the commencement of the Saving
Australian Dairy Act. Importantly, the Competition and
Consumer (Industry Codes—Food and Grocery) Regulation 2015 (the Grocery
Code), which has existed since 2015, is a voluntary, not mandatory, code.[55]
About the voluntary Grocery Code
The Grocery Code governs certain conduct by the
supermarkets (also referred to as retailers) and wholesalers in their dealings
with suppliers, with the aim to improve standards of business conduct in the
food and grocery industry. The Grocery Code was developed in response to public
concerns about the conduct of retailers and wholesalers towards their suppliers.[56]
The Grocery Code is an industry-led initiative that was jointly developed by
Coles, Woolworths and the Australian Food and Grocery Council (a supplier
representative organisation).[57]
A signatory can also withdraw from the Grocery Code by
writing to the ACCC.[58]
Suppliers are automatically protected by the Grocery Code when dealing with a
signatory. The three largest retailers, ALDI, Coles Supermarkets Australia Pty
Ltd (Coles) and Woolworths Group Limited (Woolworths) have all become
signatories to the Grocery Code.[59]
Review of the Grocery Code
The Grocery Code was independently reviewed in 2018.[60]
According to the final report of the review:
The broad feedback from stakeholders is that the Grocery Code
has contributed to a significant improvement in retailer-supplier relations
over the last three years. Coles and Woolworths have taken positive action and
made changes to implement the Grocery Code requirements. They have revised
their Grocery Supply Agreements, employed code compliance teams, and engaged in
extensive training in the Grocery Code for their buying teams.[61]
[emphasis added]
And further:
The Review found that generally the Grocery Code has
contributed to a change in business culture within the major retailers, which
has been led by senior management of both organisations. However, the Review
did hear of allegations of continuing problematic behaviours occurring
at the retailer’s buying level during their direct dealings with suppliers.[62]
[emphasis added]
To that end the review made 14 recommendations for
improvement.[63]
However it did not recommend that the Code become mandatory.
About the
Dairy Code
As stated above, since the introduction of the Bill, the Competition and
Consumer (Industry Codes—Dairy) Regulations 2019 (the Dairy Code) was
registered and commenced on 1 January 2020. It is a mandatory code.
Who does it apply to?
The Dairy Code is directed towards processors
which are defined in the Dairy Code as corporations that purchase, or that may
purchase milk[64]
from farmers.[65]
Who is excluded?
The Dairy Code specifically excludes a small
business entity from having to comply with some of its terms.[66]
(These are indicated below.) The term small business entity takes
its meaning from section 328-110 of the Income Tax
Assessment Act 1997.[67]
Essentially, a small business entity for an income year is an entity that
carries on a business in that year and either or both of the following applies:
- the
aggregated turnover of the business for the previous year was less than $10
million or
- the
aggregated turnover for the current year is likely to be less than $10 million.
Requirement to act in good faith
The Dairy Code contains an overarching requirement that
processors and farmers deal with one another in good faith.[68]
Requirement to have a milk supply agreement
Milk supply agreements must comply with the Dairy
Code.[69]
This means:
- a
processor must not purchase milk from a farmer other than by a milk supply
agreement[70]
- if
the milk supply agreement is not in writing, the processor must make a written
record of the contents of the oral agreement and provide a copy to the farmer
within 30 days[71]
- if
a variation to a milk supply agreement or the termination of a milk supply
agreement is unwritten, the processor must make a written record of the
variation or the termination and provide it to the farmer within 30 days.[72]
Standard form agreements
The Dairy Code requires a processor to publish on its
website, by 2 pm on 1 June in a calendar year (called the publication
deadline), one or more standard forms of milk supply agreements that
the processor is willing to enter into.[73]
The requirements for publishing standard form agreements
are as follows:
- the
supply period must start on 1 July in that calendar year
- there
must be a cooling-off period of 14 days
- a
statement of the circumstances in which the processor would be willing to enter
into a milk supply agreement in that form is to accompany the standard form agreement
and
- a
processor must not, before the end of the 12 months starting at the publication
deadline, vary or remove standard forms published on its website.[74]
However, the requirement to publish standard forms of
agreement by the publication deadline does not apply to a small business
entity.[75]
What a milk supply agreement must contain
A milk supply agreement must, amongst other things:
- state
the first and last day of the supply period[76]
- specify
the quality and quantity of the milk to be supplied[77]
- specify
the actions that the processor may take if the milk does not meet the quality
and quantity requirements—including the circumstances in which the processor
may reject the milk[78]
- require
the processor to give to the farmer, as soon as practicable after the processor
rejects the milk, written notice setting out the reasons for the rejection and
the consequences for the farmer[79]
- specify
the minimum prices under the agreement[80]
- specify
any fees payable by the farmer for any services the processor may or must
perform[81]
- provide
for a 14 day cooling off period[82]
and
- set
out any circumstances in which the agreement may be varied or terminated.[83]
Dispute resolution
The Dairy Code requires a processor to have an internal
complaint handling officer to manage complaints. In addition, parties to a milk
supply agreement may choose to settle a dispute by mediation.[84]
Record keeping
The Dairy Code imposes record-keeping requirements on both
processors and farmers. The relevant documents must be kept for six years after
the agreement ends.[85]
Penalties for breach of the Code
The penalties for breach of the Dairy Code are civil
penalties (that is, not criminal) and the maximum amount payable in relation to
a breach is 300 penalty units. This is equivalent to $63,000. The amount of the
penalty is consistent with other industry codes.
Concluding
comments
There are three measures in the Bill which amends the CCA.
The first measure empowers the ACCC to establish a base or
minimum price for the milk fat and protein content of milk produced on the farm
in each milk region or specified area.
The second measure proposes that the Productivity Minister—being
the Treasurer—will require the PC to inquire into a divestiture regime which
will apply to the food and grocery industry. Whilst the requirement is
consistent with the terms of the Productivity Commission Act, the time
limit for producing its final report is short. As any divestiture regime is
likely to apply to food and grocery retailers such Coles and Woolworths, a
longer period for consideration would be prudent.
The third measure in the Bill requires the Minister to
make regulations to prescribe a mandatory code of conduct for the food and
grocery industry within six months of the commencement of the Saving
Australian Dairy Act. There are two matters to be noted in that regard:
- the
Grocery Code has been in place since 2015. A review of the Grocery Code found
that it contributed to a significant improvement in retailer-supplier relations
over the last three years. Although there remained allegations of continuing
problems they were not sufficient for the review to recommend that it should be
made into a mandatory code. The mandatory code proposed by the Bill would
require the repeal of the existing Grocery Code
- a
new Dairy Code commenced on 1 January 2020. There has not been any time to
evaluate the efficacy of the Dairy Code at the time of writing this Bills
Digest.